Summary of Great Lakes’ Contractual Obligations
Northern Border’s contractual obligations related to debt, operating leases and other long-term obligations as of December 31, 2007, included the following:
Payments Due by Period
Less Than After 5 Total 1 Year 2-3 Years 4-5 Years Years 7.75% senior notes due 2009 200.0 – 200.0 – – 7.50% senior notes due 2021 250.0 – – – 250.0 $250 million credit agreement due
2012 166.0 – – 166.0 –
Interest payments on debt 321.3 43.1 65.6 49.3 163.3 Operating leases 72.1 2.5 4.7 3.8 61.1 Other long-term obligations 3.1 0.8 1.5 0.8 – 1,012.5 46.4 271.8 219.9 474.4
Operating Leases
Northern Border is required to make future minimum payments for office space and rights-of-way under non-cancelable operating leases.
Other
Northern Border is required to pay $3.6 million over a five year period under a transition services agreement between ONEOK Partners GP and TransCanada Northern Border, related to the reimbursement for shared assets acquired by ONEOK Partners. In 2007, a charge of $2.3 million was recorded in operations and maintenance expense and $1.3 million was recorded as plant, property and equipment.
Amended and Restated Credit Agreement
On April 27, 2007, Northern Border entered into a $250 million amended and restated revolving credit agreement (the ‘‘2007 Credit Agreement’’) with certain financial institutions. The 2007 Credit Agreement was used to refinance the outstanding indebtedness under Northern Border’s $175 million revolving credit agreement dated as of May 16, 2005 and was used to repay all of the $150 million of its 6.25 per cent Senior Notes due May 1, 2007. The 2007 Credit Agreement can also be used to finance permitted acquisitions, pay related fees and expenses, issue letters of credit and provide for ongoing working capital needs and for other general business purposes, including capital expenditures. Northern Border may, at its option, so long as no default or event of default has occurred and is continuing, elect to increase the capacity under its 2007 Credit Agreement by an aggregate amount not to exceed $100 million, provided that lenders are willing to commit additional amounts. At Northern Border’s option, the interest rate on the outstanding borrowings may be the lenders’ base rate or the LIBOR plus a spread that is based on its long-term unsecured credit ratings. The 2007 Credit Agreement permits Northern Border to specify the portion of the borrowings to be covered by specific interest rate options and to specify the interest rate period. Northern Border is required to pay a facility fee of 0.05 per cent based on the principal amount of the commitment of $250 million. The term of the agreement is five years, with options for two one-year extensions.
Under the 2007 Credit Agreement, Northern Border is required to comply with certain financial, operational and legal covenants. Among other things, Northern Border is required to maintain a ratio of total debt to EBITDA (net income plus interest expense, income taxes, depreciation and amortization and all other non-cash charges) of no more than 4.75 to 1. Pursuant to the 2007 Credit Agreement, if one or more acquisitions are consummated in which the aggregate purchase price is $25 million or more, the allowable ratio of total debt to EBITDA is increased to 5.50 to 1 for the first three full calendar quarters following the acquisition. Upon any breach of these covenants, amounts
Summary of Northern Border’s Contractual Obligations
outstanding under the 2007 Credit Agreement may become immediately due and payable. At December 31, 2007, Northern Border was in compliance with all of its financial covenants.
The fair value of Northern Border’s variable rate debt was approximately the carrying value since the interest rates are periodically adjusted to reflect current market conditions. As of December 31, 2007, Northern Border’s outstanding borrowings under its credit agreement were $166 million. The average interest rate on Northern Border’s credit agreement at December 31, 2007 was 5.35 per cent.
Interest Rate Collar Agreement
In August 2007, Northern Border entered into a zero cost interest rate collar agreement (the ‘‘Collar Agreement’’) to limit the variability of the interest rate on $140 million of variable-rate borrowings during the period from October 30, 2007 through October 30, 2009 to a range between a floor of 4.35 per cent and a cap of 5.36 per cent. Northern Border has designated the Collar Agreement as a cash flow hedge. At December 31, 2007, Northern Border’s balance sheet reflected an unrealized loss of approximately $1.9 million with a corresponding decrease to accumulated other comprehensive income (loss) related to the changes in fair value of the Collar Agreement since inception. Since inception, Northern Border has not recognized any amounts in income due to ineffectiveness of the Collar Agreement.
Long-Term Financing – Debt Securities
Northern Border periodically issues long-term debt securities to meet its capital resource requirements. All of Northern Border’s outstanding debt securities are senior unsecured notes with similar terms except for interest rates, maturity dates and prepayment premiums.
Northern Border’s senior notes issuances of $200 million due in 2009 and $250 million due in 2021 are borrowed at fixed interest rates of 7.75 per cent and 7.50 per cent, respectively. Northern Border intends to maintain the current schedule of maturities, which will result in no gains or losses on their respective repayments. Northern Border intends to refinance the senior notes due in 2009 with a mix of long-term fixed rate debt and short-term variable rate debt. The indentures of the notes do not limit the amount of unsecured debt Northern Border may incur but do restrict secured indebtedness. In 2007, Northern Border repaid all of the $150 million of its 6.25 per cent senior notes due May 1, 2007 with borrowings under the 2007 Credit Agreement. At December 31, 2007, the aggregate fair value of the outstanding senior notes was approximately $493 million. In 2007, interest expense related to the senior notes was $37.4 million.
Distributions to partners are made on a pro rata basis according to each general partner’s ownership percentage, approximately one month following the end of a quarter. Great Lakes’ and Northern Border’s respective Management Committees determine the amount and timing of cash distributions, where the amount of such distributions is based on available cash flow as determined by a prescribed formula. Any changes to, or suspension of, Great Lakes’ or Northern Border’s cash distribution policy requires the unanimous approval of its respective Management Committee. Northern Border’s Management Committee changed its cash distribution policy effective in January 2004 to distribute 100 per cent of the distributable cash flow based on earnings before interest, taxes, depreciation and amortization less interest expense and maintenance capital expenditures. In 2006, upon the closing of the purchase and sale of the 20 per cent interest in Northern Border, the Northern Border Management Committee adopted certain changes to the Northern Border cash distribution policy related to financial ratio targets and equity contributions. The change defined minimum equity to total capitalization ratios to be used by the Northern Border Management Committee to establish the timing and amount of required equity contributions. In addition, any shortfall due to the inability to refinance maturing debt will be funded by equity contributions.